Among the giants

South Africa’s boutique producers generate tremendous excitement, yet that doesn’t represent the whole story, says James Lawrence.

Top export markets for South African still wine
Top export markets for South African still wine

The pace with which South Africa has transformed its viticultural landscape is remarkable. Once held back by apartheid and the stultifying controls and price-fixing monopolies of previous governments, the country is now a strong presence in the world’s key export markets. According to the International Organisation of Wine and Vine (OIV), South Africa is the eighth largest producer of wine globally and is ranked 12th in terms of surface area under vines, with approximately 99,000 ha. The SA Wine Industry Information & Systems (SAWIS) reports that in 2016, the wine industry contributed over R37m ($2.98m) to the economy. 

Today there are more than 495 private cellars in operation in the Western Cape and investors are rushing in to develop the Cape Winelands as a major tourist destination. Moreover, continued praise from influential critics such as Tim Atkin MW has ensured that premium South African wines have found an eager fan base in leading restaurants, and retailers, across the globe. 

However, hidden beneath the glamour of artisan labels and luxury hotels, there is a very different, and nuanced, story to be told. 

Volume producer

South Africa is still predominantly a bulk exporter of wine — according to the OIV, more than 55 percent of wine exported in 2016 was in bulk. And while boutique labels dominate headlines, the industry — particularly South Africa’s growers — is heavily reliant on the marketing and promotional efforts of four major companies. 

At the top of the volume hierarchy stands the Distell Group, responsible for just under 32 percent of South Africa’s total wine production, according to Euromonitor. In terms of overall volume, Distell has no direct competitors — the KWV Group accounts for approximately 4.5 percent of the total market, placing it at number two. KWV boasts a long history; it is the Cape’s first major wine organisation, inaugurated in 1918. Back then, KWV was essentially a state-run co-operative designed to provide a market and control prices for everything produced in the Cape, regardless of quality. Today it is a fully privately owned enterprise, competing with Van Loveren Family Vineyards (2.4 percent of the market) and DGB (1.4 percent). Accolade is another vital component in South Africa’s marketing mix — its flagship Kumala is the nation’s biggest export brand. However, in terms of overall volume produced, these companies are not in the top five.

Distell, the world’s 12th producer, was created in 2000 through the mergers of Distillers Corporation (SA) Limited and Stellenbosch Farmers Winery Group Limited. With a 2017 turnover of ZAR22.3bn ($176.3m) and more than 5,000 staff, the firm continues to be a major force. Its global wine portfolio is led by the Nederburg range, while 4th Street — the biggest wine brand in South Africa — continues to deliver double-digit growth in South Africa, Botswana, Namibia and Lesotho. “Our portfolio delivered resilient growth in revenue and profit against the backdrop of a challenging local and global environment and changes in consumer behaviour,” says Distell’s chairman Jan Jonathan Durand. “We succeeded in delivering 3.7 percent growth in 2017 in Group revenue.”

“We currently export 60 percent of total branded volume across categories — that is including spirits. However for export, wine is around 95 percent of that number,” adds Boyce Lloyd, KWV’s CEO. “Of exports, roughly 60 percent goes into the European region, which includes Russia. In all these markets KWV is a significant player within the wine category. I believe that key industry players have done great work in expanding the wine consumer base; whether the industry can leverage off this and create more value through trade-up is a key challenge and opportunity for all of us.”

The country’s largest market is the UK, followed by Germany and the Netherlands. China has also shown impressive growth in recent years — according to the IWSR, volumes grew by 15.9 percent between 2011 and 2016. Moreover, the industry received an added boost in 2016, when South Africa signed the Economic Partnership Agreement (EPA) with the European Union, creating a free trade area that covers 90 percent of bilateral trade between the EU and South Africa.

Travel retail also remains an important revenue stream for South African wines. “Overall sales volumes increased by 3.6 percent, supported by volume growth in Europe, Asia Pacific, Latin America and travel retail,” says Steven Nathan, managing director international at Distell. “North America, on the other hand, experienced volume declines in both the US and Canada.”

Yet DGB reports that demand in the US market is growing, at least for its range of wines. “USA, Canada and China have been the core focus markets; Europe very much in a holding pattern,” says Greg Guy, DGB’s international director. “USA, Canada and China have all had good growth. Our continued focus will be on North America and China, but our overriding focus is to sell higher priced wine and these markets offer more opportunity than others to do so.”

Yet there are clearly both major opportunities and threats on the horizon for South Africa’s vignerons. Rising production costs and exposure to outside economic shocks, such as exchange rate fluctuations, continue to eat into profitability, affecting both small enterprises and major corporations. “Brand managers won’t broadcast this, but relatively few private cellars in the Cape actually make a profit,” reveals Hylton Appelbaum, owner of DeMorgenzon. “Of course, I can’t give an exact figure, but the widely accepted anecdotal one is that approximately 10 percent to 15 percent of wineries currently make any money.”

It’s a similar story in the corporate sphere. “International wine revenues were down in 2017, due to the exchange rate impact,” says Distell’s Nathan. His counterpart at rival firm DGB paints a more sombre picture. “If we do not get the necessary price increases, we might as well just shut up shop. It is time for the leading players in the industry to realise that South Africa must not be seen as the number one destination for cheap and cheerful wine,” says Guy.

How to premiumise

Pushing a more premium image — and the resulting price increases — is the common thread that now ties the export marketing strategies of South Africa’s artisan and corporate brands together. “In the international markets, our premiumisation strategy was a strong performance driver, delivering new on-premise listings and improving the mix of products sold,” says Nathan. 

Nevertheless, it is clear that one of the industry’s key weaknesses is a lack of strong brands in the mid-range segment of $7.00 to $9.00. This is the world’s fastest growing segment, offering healthier margins that will become increasingly essential in the face of rising costs. “Our wines have 350 years of history and heritage and what we have learnt in the past 25 years of ‘post isolation’ has taken quality to the next level,” says Guy. “We mustn’t be scared to ask for higher prices as our wines are good enough to demand these prices. When France or Italy tells the markets that it ‘needs’ an increase of 15 percent due to short supply, the market accepts it, yet when South Africa tries we get pushback from buyers. We need to change this mindset.”

In addition, proposed alcohol legislation could include higher taxes, restrictions in alcohol marketing and a change in the legal drinking age. “The current government is fixated on tackling the nation’s chronic problem with alcoholism,” says Appelbaum. “We have considered building a restaurant on the estate, as we fear the government will ban the sale of alcohol in wineries in 2018 unless there is an accompanying food element.” There is also talk of seizing and redistributing white-owned farmland in the South African parliament, although Appelbaum believes that is simply aggressive posturing by the incumbent party ANC, rather than a realistic policy.

Brexit is another ongoing concern for South Africa’s exporters. “In the UK, the impact of Brexit was experienced most significantly through the devaluation of the pound, which constitutes 37.3 percent of our currency exposure. Revenue declined by 13.9 percent, but was flat on a normalised basis,” says Distell’s Nathan.

As the industry continues to push the premium message, there are emerging markets to develop and key challenges to overcome. Distell cites Latin America and China as the two markets most likely to grow in importance for South African wines, a claim supported by IWSR data. “Global economic growth levels are projected to accelerate from 2018 onwards, driven by a pickup in advanced economies as well as improved conditions in China. Emerging markets that have been under pressure in recent years — notably Brazil, Russia and Nigeria — are also expected to improve,” reports Jan Jonathan Durand.

His colleague Nathan adds that: “The political and economic environment in Latin America turned marginally more favourable for consumers than a year ago, and early signs of growth are encouraging. Durbanville Hills and Nederburg showed strong growth throughout the region with wine volumes up 37.9 percent and revenue up 29.5 percent. We expect to see a continued increase in these sales in 2018, particularly in Brazil, which is Distell’s biggest export destination in the region.”

In 2017, Distell strengthened its leadership position in the sparkling wine category — the world’s fastest growing category — through the house of J.C. Le Roux by launching a new drier range of bubbly, Vibrazio. DGB and KWV are reportedly also planning to expand their sparkling portfolio in 2018. 

The big dry

Yet it is the severe drought that has occupied most headlines in recent months. According to SAWIS, the 2018 harvest totalled 1,220,920 tonnes, 15 percent less than in 2017. “The drought has had a devastating impact on many farmers,” says Boyce Lloyd. “There is therefore very substantial cost pressure in our value chains, some of which we will need to absorb, but price increases are inevitable. On the positive side, farmers are benefiting from increased grape prices without which they cannot survive. Time will tell the extent to which inevitable price increases of wine on shelves will impact sales.”

Overall, it’s a tangible sense of optimism, not pessimism, that hangs in the air. The industry has already put in place initiatives to tackle the effects of the drought and water shortage, most notably Distell’s Water Management Programme. Good governance, continued innovation, brand diversification and a balanced approach to developing both local and international markets have kept the industry’s major players in a relatively robust position, despite the tough trading conditions. 

As Distell’s managing director Richard Rushton says: “We expect higher VAT and above-average excise increases, potential water shortages and a stronger Rand to affect our exports. However, our diverse portfolio of brands, and ability to compete across the price continuum, positions us well for any improvement in business and consumer confidence.” 

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